What is the Long-Range Financial Plan and why do we need it?

LRFP III makes Ottawa's current financial picture clear and accessible to residents, businesses and elected officials. It provides elected officials with essential information for making decisions that are both financially responsible and responsive to community needs. It provides a comprehensive review of the City's financial conditions that will also help frame discussions with other levels of government and the community. In addition, it focuses on challenges to the City's financial sustainability and identifies some strategies as options for consideration in order to achieve long-term financial sustainability.

The Local Government Association of Australia defines financial sustainability within the municipal government context as:

"…a government's ability to manage its finances so it can meet its spending commitments, both now and in the future. It ensures future generations of taxpayers do not face an unmanageable bill for government services provided to the current generation."

Using this definition, a municipality's long-term financial performance is only sustainable when planned long-term service and infrastructure levels and standards can be met without resorting to unplanned increases in rates or disruptive cuts to services.

The City of Ottawa is a complex service delivery organization with approximately 17,000 employees, a $2.2 billion budget, and responsibility for managing over $26 billion in public assets. It is an important economic generator in the local economy, supporting approximately 7,000 local vendors and adding $1.5 billion to Ottawa's economy every year. It also has more than 100 different public services, many of which are either provincially mandated or provincially and/or federally regulated.

As a corporation, the City's approach to managing its finances, including long-range financial planning, has earned the respect of independent financial agencies. Moody's Investors Service has awarded the City an Aaa credit rating for the sixth year in a row, noting: "The City has displayed strong financial performance over the past several years, reflecting strict fiscal discipline and a commitment to long-range financial planning."^A

The core business of the City of Ottawa is to deliver important services that enhance Ottawa's quality of life on a daily basis. The City also builds and maintains extensive and critical public infrastructure like roads, bridges, sidewalks, community centres, swimming pools, sewers and watermains.

In 2005, Mercer International rated Ottawa 20th in the world for quality of life, ahead of Montréal, Calgary and most American cities, and ranked it 122nd out of 144 cities for cost of living, making it less expensive to live in than Toronto, Vancouver, Calgary and Montréal.

The City is doing well and yet, as this document shows, there are challenges ahead if we are to maintain our current standard of living. Canadian cities simply do not have the financial tools to meet all of their responsibilities. While cities deliver most of the services and build most of the infrastructure that support economic growth, they receive almost none of the tax revenues generated by that growth. Ontario municipalities are further disadvantaged by having to deliver and fund health and social service programs.

Ontario cities must fund services with only three main tools under their control: property taxes, user fees and development charges. Experts agree that, although the federal and provincial governments have begun to provide municipalities with new funding streams by sharing a small portion of their gas taxes, funding from the federal and provincial governments remains ad hoc and inadequate. Municipal finance experts Richard Bird and Enid Slack wrote in May, 2006:

"Big cities…are economically critical to the country's success …[but] they are, in a sense, nobody's business. We suggest…that this situation cannot continue. Either someone 'up there' in the constitutionally 'real' federal and especially provincial spheres has to begin to take cities seriously, or the good life [currently enjoyed] in Canada's large cities may…become considerably less good…[It] is very likely that …Canadian cities are, if not over the 'fiscal hill', at least close to the top."^B

The City of Ottawa is working with other large cities in Canada to try to change the municipal fiscal imbalance, and strategies aimed at that objective are presented in this document. In the meantime, Ottawa must continue to succeed within the existing framework until real change occurs at other levels of government.

The challenge of preserving Ottawa's existing quality of life requires elected officials to work with residents to find the right balance between maintaining existing services and infrastructure for our growing city, providing services mandated by the Province, and enhancing services to meet emerging community needs, all with the limited number of existing funding tools available to Ontario municipalities.

Elected officials and residents need information contained in LRFP III in order to be able to make informed decisions about City services, service levels and how services will be funded - decisions that touch everyone's lives and have long-term impact. A brief summary of this information follows.

Ottawa has a strong economy that is growing.

Changing demographics mean changing municipal service needs.

The City's operating spending is in line with other Ontario cities.

Comparison of peer-to-peer city spending (on a per-household basis) between Ottawa, Toronto and a seven-city average of Ontario municipalities (Peel, York, Halton, Niagara, Durham, Hamilton and London) shows that overall spending in Ottawa is only 4% higher than for the seven-city average and 30% less than in Toronto. Ottawa's spending was comparable to or below the seven-city average for more than half of the 21 services reviewed. Spending was higher than the seven-city average for big-city services such as social assistance, social housing and transit.

However, Ottawa spends the same or less per household than Toronto to provide those big-city services. In fact, Ottawa spends less for over three-quarters of the services when compared to Toronto.

Ottawa spends more on providing winter services such as road and sidewalk snow clearing and salting than Toronto or the other seven cities because of harsher winters and the larger geographic size of the City. Ottawa is still growing and must pay for programs and services in new communities. Toronto does not face these pressures because the city infrastructure and services have already been built.

As with other municipalities, the cost of goods and services needed to run City operations has outpaced increases in the Consumer Price Index (CPI). The bulk of budget pressures large municipalities face every year are made up of cost increases above CPI for employee compensation, energy, fuel, steel, concrete and many other goods and services.

In the past six years, the City has been able to manage these pressures as a result of savings from amalgamation and the implementation of efficiency programs and service reductions. The City remains committed to continuously improving efficiency and obtaining best value for purchased goods and services through competition. However, these savings will be much lower than those achieved immediately following amalgamation.

Over the next four years, the cost of providing existing services is projected to increase from $55 million to $61million per year.

Provincial social programs should not be on the tax bill.

Estimated requirements for social programs over the next four years are forecasted to increase property taxes by approximately 0.7% annually, representing a $6 to $8 million increase per year.

If the Province funded all of its mandated cost-shared programs, the average urban residential household in Ottawa would pay $670 less in property taxes per year.

Ontario municipalities have argued for many years that income redistribution programs, such as social assistance, should not be funded from property tax - a regressive tax that does not reflect the income level of a property owner. Instead, it would be more appropriate to fund these programs from provincial income taxes.

The Province is not adequately funding its share of cost-shared programs.

For 2006, the funding gap for such programs totals about $16 million. There is no other choice than to fund the gap from Ottawa property taxes as the City is mandated to provide these programs at the level of service determined by the Province.

Provincial funding inequities favour Toronto taxpayers over Ottawa taxpayers.

The peer-to-peer spending comparison showed that Toronto spends more per household on social assistance than Ottawa. It also showed that the two cities require comparable amounts of tax per household for social assistance. Toronto's high social assistance costs have been recognized by the Province, and a program was put in place requiring neighbouring municipalities to contribute to Toronto's social service costs. In 2005, this equalization formula helped Toronto taxpayers save $189 million in property taxes.

Ottawa's social assistance and social housing costs are higher than the provincial average, but Ottawa does not have the benefit of being included in any type of pooling. If Ottawa were to be included in the same pooling formula, Ottawa residents would pay $53 million less in taxes.

The Ontario Municipal Partnership Fund (OMPF) provides grants to municipalities with high social costs. In 2006, Ottawa will receive $6 million in OMPF grants, or approximately 3% of social program expenditures. Toronto will receive $34.9 million in OMPF grants, representing 6% of its social program costs. If Ottawa residents were treated the same as those in Toronto, Ottawa's grant would be $12 million.

Managing compensation costs is one of the most important issues for large municipalities.

A review of compensation by Mercer Human Resource Consulting showed that unionized City positions are paid the same as those in other municipalities and the same or slightly better than positions in the private sector. The same is not true for many specialized technical positions and many management positions, which are paid below the median rates for the private sector.

The City is managing compensation costs by ensuring that there are tight controls on staffing levels. At amalgamation, there were 12,786 Full-Time Equivalent (FTE) positions. Through reductions from amalgamation, the Universal Program Review and the 2006 budget, 1,236 FTEs have been eliminated.

There has been an overall net increase of 682 FTEs since amalgamation (including 306 more police FTEs), or 5.3% more than in 2000. However, it is important to note that the ratio of staff per thousand residents has declined since 2001 from 16.2 staff per thousand residents to 15.5 staff per thousand. There are 367 fewer administrative and support staff than in 2000 and 743 more operational or front-line service staff.

Ottawa taxes are similar to other large Ontario cities - cities need new revenue sources other than taxation.

The Province provides annual property assessments through the Municipal Property Assessment Corporation (MPAC). Ottawa has high property values and some neighbourhoods have seen large increases in the last two re-assessments. Municipalities need tools to mitigate the impact of these changes.

The Province sets the rate of tax increase based on re-assessment of commercial, multi-residential and industrial properties. The phase in of tax increases in these classes has resulted in taxation inequities. Cities need more control over the implementation of changes that result from re-assessment.

Economic and policy experts agree that Canada's cities lack the legislative and financial tools needed to adequately fund the services and programs they must deliver. If the municipal fiscal imbalance is not addressed soon, Canadian cities will not be able to continue to fund existing services and infrastructure. Rectifying this situation is essential for Canada's economic prosperity.

Municipalities fund operations through property taxes, grants from federal and provincial governments, user fees, water and sewer rates and transfers from City reserve funds. However, none of these sources of revenue are growing at adequate rates to fund the annual growth in expenditures. Therefore, the City must look beyond taxation and user fees to other sources of revenue.

Canadian cities are having difficulty finding adequate funding for infrastructure projects.

Historically, there has been a trend to defer capital rehabilitation and renewal to meet the pressure for balanced municipal budgets without large tax increases. The May 2006 research report on municipal finances prepared by Standard & Poor's, reported that:

"Municipal infrastructure renewal is now an important national issue. Municipal infrastructure deficiencies are typically related to water, sewer, road and transit networks, and municipal building and facilities. Estimates of the total national municipal deficiency, ranging from C$60 billion to C$120 billion, have been frequently reported."^C

Liabilities incurred today must start to be funded by today's taxpayers.

Prudent and sustainable financial management strategies are needed to ensure future generations are not required to absorb a disproportionate share of these costs.

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^AMoody's Investors Service analysis of the City of Ottawa, July 2006.

^BSlack, Enid and Bird, Richard M. "Cities in Canadian Federalism." Presentation. Conference on Fiscal Relations and Fiscal Conditions. Georgia State University, Atlanta. May 2006.

^CStandards and Poors, Public Finance Report Card: Municipalities. May 25, 2006.